Scotland Yard said the peer, known as “Lord Cashpoint“, was detained on suspicion of conspiracy to pervert the course of justice when he answered bail yesterday for alleged breaches of the Honours (Prevention of Abuses) Act 1925 and the Political Parties, Elections and Referendums Act 2000.

He was bailed pending further inquiries.

The dramatic twist led opposition politicians to compare the affair to the cover-up after the Watergate crisis, which led to the resignation of President Richard Nixon in 1974.

Lord Levy, who is also the Prime Minister’s personal envoy to the Middle East, is the second close ally of Mr Blair to be arrested on suspicion of perverting the course of justice.